Custom «Financial Statement Analysis» Essay Paper Sample

Financial reports are important for the success of any firm, both in the short and long run. They indicates how businesses carries out their activities and are vital for firms board of directors, managers, employees, labour unions as well as stakeholders. Externally, the financial reports are used by the prospective investors, lenders like the credit rating bureaus and banks, government agencies for the purposes of taxations, stockbrokers and the investment analysts among other notable users. It is worth noting that strong financial reports depict the success of the firms, thus enabling them to attract a vast number of investors and increase their profitability levels. Based on this, organisations should comprehensively carry out their financial analysis to make information easily understandable to the people accessing it, thereby enhancing better interpretations. This paper will critically analyse and interpret a five year financial statements of Hallenstein Glasson Holdings Ltd New Zealand and Pumpkin Patch Ltd.

Trend Analysis and Comparative Evaluation

Weston argues that the working capital management entails relationship between firm’s short term assets as well as short term liabilities. The main aim of the working capital management is ensuring that the firms are able to continue their operations. It has sufficient abilities of satisfying both the maturing short-term debts and the emerging operational expenses. The general management of the working capital entails management of inventories, account payable, receivable and cash.

Liquidity Ratios

Liquidity ratios assist a company in determining its ability to meet the short-term financial obligations. The ratios are of vital importance to the firms’ creditors, as they determine the credit worthiness of the company.

Average Collection Period

This is the approximate period that a business took to receive payments owned to them, in term of receivables from its clients and customers.

It is calculated as;

Average collection period= (Days * AR)/ Credit sales.

Where
Days are the total amount of days
AR is the average amount of accounts, which are receivables
Credit Sales is the total amount of the net credit sales during a particular period

For Pumpkin Patch Ltd;

Average collection period= (Days * AR)/ Credit sales.

= (365*1309)/3910=122.195

For Hallenstein Glasson Holdings Ltd;

Average collection period= (Days * AR)/ Credit sales

= (365*1958)/2,590

=133.43

Debt to Equity Ratio

Debt to equity ratio assists the investors to be aware of the extent at which any firm pays for its assets.

Debt to Equity Ratio= (Long-term debt/share holders Equity).

For Pumpkin Patch Ltd:

Debt to Equity Ratio= (Long term debt/share holders Equity)

= (68, 651/115,098) =0.59:1

For Hallenstein Glasson Holdings Ltd:

Debt to Equity Ratio= (Long-term debt/share holders Equity).

= (78, 103/130,090)

=0.60:1

This means that both companies have more room of borrowing the money to cover the cash requirements, which arise in the course of doing business. Further, cash borrowed can be used to take the advantages of any investments opportunity that may come by.

Profitability Ratios

In most circumstances, profit is used as a yardstick for measuring the success of any company. However, it is vital to compare the firm’s profits earning capacities in a relation to capital employed net profit ratio. This ratio indicates the margins of the sales as compared to bought or the factory costs.

For Hallenstein Glasson Holdings Ltd:

Net profit ratio = (Gross profit/sales) * 100.

= (19,581/207,139)*100

=9.45%

For Pumpkin Patch Ltd:

= (24,340/198, 133) * 100=12.47%

Conclusion

Based from the above case studies, one can see that both Hallenstein Glasson Holdings Ltd and Pumpkin Patch Ltd are successful firms. This is the main reason why they continue to invest in a great number, despite the prevailing hard economic times.